REO's bond rating cut in uncertain property market
Company remains upbeat with tenant occupancy at 98pc
Published 13/02/2010 | 05:00
SOME bonds linked to Treasury Holdings' REO property company have now been downgraded to junk status as concern grows over the state of the Irish property market.
Treasury, founded by Johnny Ronan and Richard Barrett, controls almost 70pc of REO and four years ago REO issued €375m of bonds through a company called Opera Finance.
During the week the London office of Standard & Poor's (S&P) downgraded some of the bonds to B, a rating which means that with a change in circumstances there could be a default on these bonds. Other bonds were slashed to BB, also a junk rating, which gives investors what is called "fair protection''.
The majority of the bonds were slashed from AAA to A, a drop of five notches, which is a large deterioration in terms of credit quality. This rating means that a change in the economic climate could affect the prospects of these bonds.
The latest downgrade means that two of the four classes of bonds belonging to Opera are now classed as junk or non-investment grade, although the majority continue to benefit from an A rating.
S&P declined to comment on why it had slashed the bond ratings so severely at this time.
Asked to comment, the company provided the following statement: "REO has consistently outperformed the market due to the quality and location of our assets.
"While it is undoubtedly a challenging market environment, vacancy and tenant defaults remain very low with occupancy at 98pc. Rental income has increased due to recent rent reviews and cash flow is strong''.
It is understood the downgrade is based primarily on the agency's view on Irish market values overall.
REO believes its office tenants, including KPMG and Bank of Ireland Asset Management, are highly unlikely to default or withhold rental payments.
Last October the portfolio owned by REO was marked down by 40pc by Moody's as the slump in commercial property in Ireland worsened.
Fitch said while the portfolio was capable of producing adequate income, there remained a risk of tenant default and renters looking for lower rents.
Treasury was set up in 1989 by Ronan and Barrett.
It claims to control 120 real estate projects which it recently claimed had a value of €4.8bn.
REO said in November that until NAMA was operational bank finance would remain in short supply. It said it was working on re-financing its debt burden with foreign banks.
Meanwhile, the company is committed to spending €800m on redeveloping the Ballymun shopping centre.